BAM - Brookfield Asset Management Ltd. (BAM) Presents at Goldman Sachs 2023 US Financial Services Conference (Transcript)
2023-12-06 16:44:04 ET
Brookfield Asset Management Ltd. (BAM)
Goldman Sachs 2023 US Financial Services Conference
December 06, 2023 02:20 PM ET
Company Participants
Bruce Flatt - CEO
Conference Call Participants
Alex Blostein - Goldman Sachs
Presentation
Alex Blostein
So for our next session, it's my pleasure to introduce Bruce Flatt, CEO of Brookfield Asset Management. About a year ago, Brookfield completed its spin off from Brookfield, the corporation, which Bruce actually hinted at our conference the year prior to that. So we'll see if we get any more interesting nuggets from you this year. But essentially you became a standalone asset management business with a 100% earnings coming from FRE, which is great. So today, Brookfield is one of the largest global alternative asset managers with $440 billion in fee generating capital and strong alignment across several secular themes in the space, including infrastructure demand, energy transition, growth and private credit, along with many others. Despite what's been obviously a very challenging fundraising backdrop, you guys are on track to raise a $100 billion of capital this year with AEL potentially on top of that, whenever that closes. So great year, and thank you again for being here. It's always great to see you.
Bruce Flatt
Thanks for having us.
Alex Blostein
Great. So look, I'll start this conversation along similar lines that the discussion that we had with a number of the CEOs today, it was around private market, asset allocation trends. And when you have this massive move in interest rates, clearly, that's going to drive some rethinking on behalf of institutional LPs on what role private markets play in their asset allocation. So we'd love to get your perspective on what does the allocation private markets look like in a world of higher interest rates and more importantly, how could -- how does that change the mix of asset allocations within the sector?
Bruce Flatt
So look, I think, starting more broadly from 30 years ago, institutions globally have been working on figuring out how to have alternative products within their portfolios. That's gone through many evolutions of the financial markets, collapses in the financial system, recessions. And what is crystal clear to us is that alternatives within portfolios of large entities are very attractive to the long term returns for those portfolios. They take away the distraction of the public markets and they earn extra return, because of the inherent liquidity within it. And leaving aside yearly movements, which come and go, I would say, we continue on another 10 years at least where significant greater allocations are going to alternatives. And I'll come to -- specific ones was your second question, but it's -- we increase -- many, many funds are still at 5%, 10%, 15%, 20%. People often ask me what they should have in their portfolios and the simple story is anything you do not need for liquidity purposes in your most extreme business planning should get put into alternatives, because you don't have the distraction and you earn a higher return. And that's what the most advanced institutions are doing, the others follow it. And I don't think this period of time of consternation in some funds largely focused in the US is going to stop that. We will continue for many, many years to go.
Within that, we're still seeing very significant allocations to infrastructure globally. Allocations are still very, very small and we're the large fund in that. So we're getting big, big allocations. As a subset of that transition it’s even smaller within portfolios because of -- its -- I'll call it creation over the last little while and we're getting -- seeing big, big allocations to that. Private credit obviously is a significant real estate and private equity are probably the largest in the funds today and therefore, people are not getting money back. So they're the most strained in particular technology. But what I can tell you is there are many institutions in Asia that are putting very significant allocations into alternatives even today and the Middle East in particular. So while there are some institutions in the United States that are full and need time to process, there are other institutions that are using this opportunity to scale up. So the short story is it's not stopping and there are some sectors that are still pretty strong.
Alex Blostein
One of the big themes you talked about, and that's something we see in covering this space of course as well, is consolidation of LP interest with fewer asset managers. And we've seen that unfold in many other verticals within financial services. It's not just new to the alts. But it is interesting, because it feels like it's earlier days in the old space. So when you look at your LP base and you look at the variety of products that you guys provide to the marketplace, how big of a market share opportunity does that create for Brookfield? Are there specific products that are more susceptible to that consolidation of market share for you?
Bruce Flatt
Look, I think part of consolidation in this business, it's different than if you sell chocolate bars or soft drinks. Part of it is just -- the limited partners are choosing to be with certain institutions and therefore, those get bigger and the other ones can't really survive. So they either just go out of business or aren't relevant. So part of it is just driven by LPs. We just closed our infrastructure fund at 30 billion. We didn't have to do anything and we're consolidating some people out of the business because they chose to be in our fund not in somebody else's. So that's happening. Second, look, there's no doubt, the large managers, which we have the benefit of being one, have vast fundraising machines are very global, touch every institution. And we can package products, relationships and things with institutions and do special things with large groups that a single fund of ex amount of dollars that's vastly smaller than us just can't do. They can't afford to be in Korea, as an example, with somebody in their office every morning talking to them about how we help them. And they also, just for the big ones, they can't give them the scale. Our funds can take 500 million, 1 billion, 1.5 billion, 2 billion commitments, you need to be very large funds to take those size of commitments and there's just not that many people in the world that can do that.
So I think it’s a -- consolidation is a combination of just the smaller going away and the larger getting the allocations. And two, there will be some niches along the way where we can add in skills, which we may not have today. Our Oaktree acquisition was one of those we did five years ago. And that just -- it just advanced us quickly and we were able to assist in ways that could help them to grow their business, and that's really what the consolidation is today. It's our vast fund raising machine we have, the relationships we deal with, the multi offices we have around the world and all those sort of things, just add extra benefit to those joining us if we chose to do that.
Alex Blostein
Sure. That makes perfect sense. Let's spend a couple of minutes on the business itself. And as I mentioned in my introduction, it's been about a year since you completed the spin off BAM from the corporation. It comes with a bunch of benefits to the shareholder base. One of them obviously being it's a cleaner story, you get a pretty clear, 100% FRE earnings stream. But are there any other benefits that shareholders get anything from the structure that might kind of go unnoticed?
Bruce Flatt
After a long time, we have the cleanest structure of any alternative manager out there. We have no debt, we have $3 billion of cash, we generate $2.25 billion of earnings a year of growth at 15% to 20%, it should grow in the next while at that, we pay out 85% of the earnings. It's a very simple, clean story. And I would say, the real maybe different, it's not better or worse, it's just different. The real difference is we got lucky being industrial business owners from a long time ago. Our infrastructure franchise is -- there is nothing like it in the world and that allowed us to build out a transition franchise, which now is -- there is nothing like it in the world and I think it is only going to get bigger and bigger in the next 10 years. And those two areas give us something that very few people have. So we have private equity business just like everybody else and we have real estate business, like a few, we have credit business like some, but those two franchises we have are something very special.
And there is three things going on in the world that I would say hit all of our businesses, but hit those two specifically and it's the decarbonization of everything. The digitalization of your phone and what's behind it and all the data centers and fiber and towers that are getting built and what's going on with just the deglobalization of everything, manufacturing plants, industrial capacity, chips coming back from Asia, the transaction we did with Intel. All of the things that are going on, there is just this enormous push of need for capital in those businesses, and we just happen to be in the right spot for now. But it looks like those three themes are here to take maybe even greater amounts of capital than they have for the next five, 10, 15 years. Like we have got five, 10, 15 years of this, and the amounts of capital being put into the digitalization sector, both powers fiber but now with AI and the build out of data centers, it is massive. I've not seen anything like it. What's -- what is needed as we ramp up decarbonization around the world is very -- it's tens and tens of trillions. It's very, very significant. And manufacturing capacity gets built somewhere, it's just they need diversity of sources, and India's been a big beneficiary of that for -- as an example.
Alex Blostein
Lots of durability in those trends for sure, let's talk about a couple of them. So I want to start with a transition business. Brookfield is obviously one of the largest renewable power and transition business in the space, lots of momentum, very timely. Just last week, there was an announcement that UAE has made a $2 billion commitment to your current transition fund, and I think $1 billion commitment to seed the launch of the new fund called Catalytic Transition Fund. Can you talk a little bit about both of those, how they came together and sort of the plans for further branching out around this transition theme?
Bruce Flatt
Yes. So look, I'd just say that we got lucky and that we were in the renewables business as an industrial owner for 30 years. 15 years ago, we started doing that for some clients in our infrastructure fund. Three years ago we decided the opportunity was very, very big and therefore, we had to split it out of our infrastructure fund. So we launched a transition fund three years ago. We raised $15 billion for our first time fund, which was really not a first time fund, because we had always done it in infrastructure. But it was -- it's been very successfully invested. And I think, because we had the history, we had a head start and the business, what's going to be something that is going to be enormous, institutions want to get in on it now. And so, we're out raising our second fund as we speak. The one thing I can say about the fundraising raising is we did just get a commitment from one of the Abu Dhabi funds for 2 billion. In addition to that, we're sponsoring a new fund with them where they're putting up $1 billion. It'll be for emerging markets. So our main fund is investing in developed markets, their billion dollars is going into a new fund that we're going to raise, which will be for emerging markets. And I think the spin off funds or the next iteration of all of these in transition will be very significant. So this business didn't exist four years ago. And I think, between the different spinoffs we'll have at this fund, it will be our largest business probably within Brookfield within five or seven years. And that's with a -- we have an infrastructure fund of $28 billion and a $15 billion real estate fund, $12 billion private equity and $15 billion opportunistic credit, et cetera, et cetera. I think this will be the biggest business we have, because the opportunities are very, very significant and we happen to be in a good spot.
Alex Blostein
Is the velocity of capital, they're similar, fast or slow? Meaning the amount of time it takes to put capital out, given all these needs for climate related transition, which seems like they continue to build?
Bruce Flatt
Look, the real trick here is most people can't do what we do, because they don't have the renewable power expertise, they don't have the power trading expertise and they don't know how to build all of these things, that's what we have. So you can raise money but you don't know how to arbitrage power markets and build power plants. And if you do, you can compete with us but not many people do. And we just have a head start. And it's not that others will come, they're coming, they always come. Where there's money, people come. So that's not to say there won't be competition, but we just have a big head start but we also have a bunch of innate operating talents within our businesses. We have 3,000 operating people that run our business, that work for Brookfield in power trading and development and that gives us an edge that nobody -- that very few other people have. We really compete with single industry participants that trade on the markets. And what they don't -- they have what we have in industrial operations, but what they don't have is the access to money that we do. And really our success over 25 years has been ensuring we had operating talent combined with the most money in the world. And if you can get those two things aligned, you can earn more than the only the financial players and you have access to more money than just the industrial players. And that's the trick of -- that's I guess the secret sauce of what we've tried -- what we've tried to do with Brookfield over the decades.
Alex Blostein
I got you. Okay, great. Let's talk about the second theme you talked about, which is obviously digital infrastructure and what that means for your infrastructure business. So as you mentioned your latest flagship infra fund also closed last week, $28 billion, I think, and there was a little more on top of that…
Bruce Flatt
It’s a big week for closings…
Alex Blostein
It seems like it…
Bruce Flatt
Why does everything have to come at the end of the year? I don't know, but it's good at least…
Alex Blostein
I am happy it happened before the conference so we can talk about it. So we'll take that. As of the last update, I think, you guys were about 40% deployed in that funnel already, which is pretty fast. How are you thinking about deployment pipeline from here, what differentiates you in the infra business? Because again, to your point earlier, it is getting more crowded, there are other larger players coming into the space as well.
Bruce Flatt
Yes. So we're 40% invested, it's four deals. So it's not a lot of things to have been done. They all fit one of those themes. We bought two great data center businesses. We did the Intel transaction in the fund and we bought a logistics container business, a global logistics container business. And those four businesses, we probably normally wouldn't have found four great things like that within a short period of time. But as you know, 2023 from January to June was pretty rough in the markets. Globally, everyone knows this, interest rates were cranking up like this and everyone was petrified about doing transactions. Just given the fact that we have large sums of money to put to work, we across our all of our businesses, we put I think $60 billion to work in that period of time, four of those were the deals that went into the infrastructure fund. I'm super excited about every one of those deals we did, because when there is lack of investment capital and nobody else bidding, usually it doesn't mean you get the most extreme deals but usually odds favor returns being better then you would otherwise have. And I think everything we bought in the last 12 months will be other than, if we make some mistake, they will be excellent vintage investments to have made. So we decided to put our foot on investing when nobody was investing, mostly because we could and that's why that fund is 40% invested, because we just found some great opportunities to put in the fund.
Alex Blostein
And the pipeline as you kind of look forward?
Bruce Flatt
Yes, pipeline, look, there is still -- you talked about it, many sponsors don't have money, it's tougher to get money in the banks, it’s easier today than it was 12 months ago. But it’s still not robust and that just means there is less capital and therefore the opportunities are significant. We see across private equity, across real estate, across credit, across infrastructure renewables, every single one of them, for different reasons, there are significant opportunity. And I would say it still exists. It's not as good as it was in March of last year. March of last year, there was literally no bid on lots of things, like some of the transactions we did zero bid and that does not happen in many times in the market.
Alex Blostein
Right. You mentioned real estate, let's talk a little bit about that as well. The market continues to be pretty uncertain, and you suggested that the next several years will be excellent time to deploy capital. You guys are fortunate to have obviously dry powder in that part of the business as well. Can you help us to frame opportunities for new investments of sectors, geographies versus some of the risks in the back book that you may have in your existing portfolio?
Bruce Flatt
Yes. Look I’d just frame real estate, it’s the largest business in the world. We have been around it, in it for a long time. It has been a great business and our returns over 30, 40 years have been in the 20s. There are times like this I can go back five iterations and it's been a lot worse than it is today. So actually, I do not think that anything has changed and there is anything that is different today. The most important thing from our perspective is that all of our long term assets, mostly in office and retail, they are owned in the perpetual balance sheet, the parent company, and they have owned most of those assets for 25 years plus, and it’s perpetual money and it just will be there for time. And the real thing with real estate is you have to be able to survive through periods of time. In our fund business, we have virtually no office exposure and very little retail exposure in the United States. It's mostly multifamily logistics, life sciences and alternative student housing, things like that. And the business has been very, very good and the returns look to be excellent. So I am not -- we are not worried at all about office. And what we mostly own even on the balance sheet , for office, it is very high quality office and there is a big dispersion -- high quality office around the world even in the United States is very strong. It’s low quality office, which is struggling and it’s going to continue to struggle and that happens all the time. It’s just worse this time because of the COVID effect overall.
On the opportunity side, I think, there is going to be some excellent opportunities and they split into two buckets. Bucket one, which I am not -- we are not too interested in, is bad assets that you have to do a lot of work to turn around or to redevelop. We have too much money for that in scale. Where the opportunities are coming are great assets, which have bad -- which have -- not bad capital structures. They are capital structures which are not appropriate for the environment that we are sitting in today, because interest rates went up and you have floating rate financing or whatever that is. And the easiest way to make money in real assets, especially in real estate, is to buy great assets with bad capital structures. And fortunately, there will be a number of those situations, not coming one day or there's not going to be just an event, but they're just going to be coming over the next 24, 36 months. And hopefully we can capture some of those opportunities to put into our portfolio.
Alex Blostein
Great. Let's talk about your private credit business. And it's a sizable one, it's $60 billion in illiquid private credit strategies and Oaktree opportunistic business is part of that, but then there are others as well. So as you think about the opportunity set for private credit, which is substantial, as we obviously talked about in the past, as we talked about over the last couple days here. What are your plans to sort of further expand Brookfield's private credit capabilities and is this likely to be organic built or M&A?
Bruce Flatt
I don't think we need -- we don't need anything else to keep growing the credit business. We have it all within the Oaktree franchise and within Brookfield, the different products we have. It's possible there are niches or there are businesses that come to us that could be highly additive that we could just roll into the fold. And we'll -- we continuously look at those types of opportunities. But there is -- really what this is that regulatory capital requirements are going up in the banks globally and they need partners to have capital off balance sheet, and we're either partnering with them or investing beside them in loans, and it's really simple. And it's just having more capital for the business to lend to private enterprise. And we're very excited about continuing to grow the business. I'd say our Oaktree franchise made its name in opportunistic investing in credit, that will stay and we'll continue with that business, and that's a separate business. We now have a private credit business set up and we're going to continue to grow that. And I think it'll be big partly backed by a lot of our insurance clients, including the Brookfield business that we manage capital for.
Alex Blostein
Let's talk about Oaktree for a couple minutes. Just given how important private credit is, this partnership is obviously quite critical in your efforts there, yet the business operates largely separately, they kind of still have their own infrastructure. Is there an opportunity to bring these businesses closer together to drive incremental revenue and expense energies? And I guess what's holding you back from purchasing the rest of the stake? I think you guys own 68% of the company right now.
Bruce Flatt
Yes, just 70%, I think, we bought a few percentages points last year. The deal was when we bought the firm that we would -- there was an opportunity for them, the partners to stay in and be owners with us. And we -- they also can put to us over time if they want to phase out of the business. And look, we've never had to own everything. I'd rather have them be responsible for the business, care about the business and be our partners in the business. They're very responsible, they're very good at what they do. And so we have no need nor desire to own a 100% of the business. I suspect there's small amounts of expense synergies you would get if you combine businesses. But our thesis in business has always been accountability and compartmentalization of businesses is always better than the small amounts of cost synergies you get by merging things together. When you merge things together, you get cost synergies. But what you lose often is the accountability and the culture you get from having a separate business. And I think even if we brought much more of the business, we would run it separately, because it is a different mentality, it's a different business and it's a different culture. And people businesses like ours is are very particular, and being respectful of that is something that's really important. And so we're in -- we're no need nor desire to actually go higher. Over time we'll naturally go higher because some of the growers will sell to us, but there's no great need to do it today.
Alex Blostein
All right. Let's touch base on retail expansion, that's obviously another important theme for the space. You have made an effort with a couple of products out there likely to do more. So give us an update on kind of traction you've seen with existing products in the Retail Wealth Management channel and what else is on your priority list in terms of both product expansion and distribution platforms, expansion into ‘24 and ‘25?
Bruce Flatt
Yes. So our -- we think of retail with a couple of lenses. First one is there's no doubt that what we saw 25 plus years ago in institutional management is coming to retail over the next while. So the next 25 years, I think -- and you may not see the exact same increase in amounts, but you're going to see a similar increase in amounts in retail, because alternatives are what people should have in their portfolios and therefore that will happen, all it takes is education and products properly designed for the market and that's slowly coming. So we're continuing to build our resources. We have a very large group of people dedicated to marketing these products. We have a number of products in the market, both under the Oaktree brand and under the Brookfield brand. We raise probably $250 million a month today in specific retail products. I call them semi-liquid products. The largest two of those are Brookfield Income Infrastructure Fund, BII it's called, and it was launched in Asia. We're now launching in the US in retail. And then one of the credit products we have under the Oaktree brand. But we'll have more and it's going to continue to grow.
There's not too many -- again, back to consolidation and what you asked me on the first question. There's not too many people that can have 150 salespeople, the back office, the relationship with banks and all those things, and have a brand to sell in the systems. And therefore, it'll continue to grow and go to the large sponsors with a good track record. In addition to that, with our relationship with Brookfield Corporation, they're selling annuities into broad America and that capital comes to us under management arrangements to manage the capital, and they're selling 500 million a month that comes to us. It's probably goes to 1 billion a month and maybe 1.5 billion a half a month, very shortly thereafter in the next while. So that money is broad annuities across America, which comes to us and it's sort of hitting two separate groups of the market. And that's the way -- so that's the way we think of significant scale. And the second rule is very well designed, because it has long terms on it. So it’s perfect for these types of assets to back.
Alex Blostein
Got it. That makes sense. So you mentioned insurance, I did have a quick question on that. So AEL is on-track to close in short order here. It’s an important, again, source of growing your private credit business and as a lot of the capital will be allocated ultimately to your insurance partnerships like that one. How do you view the kind of opportunity for additional M&A in the insurance space you guys have obviously grown in that business largely inorganically?
Bruce Flatt
So I am here as the Brookfield Asset Management CEO, and our goal is for to encourage the insurance affiliate, which we have no investment in, we just manage capital for them to grow as fast as they possibly can and give us as much money as they possibly can. And the good news is, they have gone from zero to $100 billion. Organically, it will grow to $250 billion in a very short period of time. And the goal is -- of that business to grow big, to grow large. In addition to that, what it’s allowed us to do with a team within Brookfield Asset Management is to spend time designing products and understanding exactly what insurance companies need with all of our products. And we are getting better and better and better in then not only servicing them but servicing all of our other insurance clients. They used to tell us we need X, Y, Z because our regulatory ratios, and we just say take this. And now we are much more respectful of their issues and we are designing products for them and I think it’s going to be game changing for that segment of our distribution, because we are getting better and better with how we turn our products regulatory wise for them.
Alex Blostein
Great. What about acquisitions at the Brookfield Asset Management level? So you guys mentioned a couple of times, including obviously today, the balance sheet is great shape, $3 billion of net cash, no debt. You talked about M&A potentially being on the table, but can we narrow that down a little bit? Are these largely tuck-in deals kind of like you talked about credits like maybe adding a few capabilities here and there or is there room for something larger and more substantial at the BAM level?
Bruce Flatt
I don't know. I would say, in the absence of anything else that really made sense, it will be tuck-in transactions or none. It may be nothing. We may just keep doing what we are doing, keep compounding away. If giving the cash back to shareholders with share repurchases and dividends and do nothing more, because we have an amazing business. There may be other businesses. We bought three or four others, other than Oaktree, we bought three or four other franchises over time and tucked them in. There may be -- I suspect there will be tuck-ins of smaller businesses and there may be something that's larger -- and probably not as large as us with a $60 billion market cap, there aren't too many of them. But there may be some other moderately sized businesses that we could tuck-in that they would make sense, because it either gave us greater geographic exposure or greater product exposure, which we don't have today. There aren't many things we are not exposed to.
Alex Blostein
Product wise, you guys kind of check all the boxes?
Bruce Flatt
I used to say that years ago and we always find something…
Alex Blostein
Maybe not secondaries…
Bruce Flatt
What is amazing, Alex, is I actually went through this the other day. I went back to 25 years ago as to what we were talking to people about and putting into our funds, and it's vastly different today. It's amazing. We still -- we just invest in the backbone of global economy, that's all we do. But the backbone of the global economy has shifted dramatically over 25 years. It's amazing. And we didn't invest in data centers before, we didn't buy telecom towers before, we didn't make semiconductor chip plants before, we didn't build life sciences buildings before. You can go through the whole -- we didn't build solar plants, we didn't build wind plants. All of the things that we do today, like, it's probably 20% of what we do now, we did 25 years ago. So it's still the backbone of global economy. But what's amazing is the backbone shifts with the evolution of technology, people, places and investments. And we're -- what we're trying to do is always think about what's the next backbone thing that can drive this business further. And transition is an example, it didn't -- the business didn't exist five years ago in our company and it's possible it'll be the largest business we have five years from now. That's amazing.
Alex Blostein
That's pretty fascinating. Great. Well, look, we're out of time. So thank you so much, Bruce. Always good to see you here. Appreciate it.
Question-and-Answer Session
End of Q&A
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Brookfield Asset Management Ltd. (BAM) Presents at Goldman Sachs 2023 US Financial Services Conference (Transcript)